WASHINGTON (Reuters) -U.S. economic growth rebounded more than expected in the second quarter, but that grossly overstated the economy's health as declining imports accounted for the bulk of the improvement and domestic demand rose at its slowest pace in 2-1/2 years.

Details of the Commerce Department's advance second-quarter gross domestic product report on Wednesday pointed to a moderation in activity despite the strength suggested by the main GDP number.

Consumer spending, the engine of the economy, grew moderately last quarter and business investment in equipment slowed sharply after posting double-digit growth in the January-March quarter.

Residential investment, which includes homebuilding and house sales via brokers' commissions, contracted for a second straight quarter. Economists said trade policy uncertainty had made it harder for businesses to plan long-term, impacting hiring and with spillover effects on consumer spending. 

President Donald Trump has imposed sweeping tariffs on imports while also delaying higher duties to allow the countries to negotiate trade deals with the White House.

"The economy is not in a recession is the good news. The bad news is that this is not a report of robust growth which would make one confident about the economic outlook for the second half of 2025," said Christopher Rupkey, chief economist at FWDBONDS.

Gross domestic product increased at a 3.0% annualized rate last quarter, the Commerce Department's Bureau of Economic Analysis said. The economy contracted at a 0.5% pace in the January-March quarter, the first GDP decline in three years.

Economists polled by Reuters had forecast GDP rebounding at a 2.4% annualized rate. The size of the economy rose to more than $30 trillion for the first time ever last quarter before accounting for inflation. 

A rush to beat the duties boosted imports in the first quarter, resulting in a record goods trade deficit that weighed on the economy. That trend reversed last quarter, with imports declining sharply, resulting in a smaller trade deficit that added 4.99 percentage points to GDP. That more than offset a 3.17 percentage points drag from inventories.

MODERATE CONSUMER SPENDING

Trade and inventories are the most volatile components of GDP. Consumer spending, which accounts for more than two-thirds of economic activity, increased at a 1.4% pace after almost braking in the January-March quarter. 

Private domestic purchases, which exclude trade, inventories and government, are viewed by economists and policymakers alike as a barometer of underlying U.S. economic growth. This measure grew at a 1.2% rate after advancing at a 1.9% rate in the first quarter. That was the slowest increase in domestic demand since the fourth quarter of 2022.

The dollar advanced versus a basket of currencies. U.S. Treasury yields rose.

Economists anticipated lackluster economic growth in the second half. Though the White House has announced a number of trade deals, economists said the nation's effective tariff rate remained one of the highest since the 1930s and noted that about 60% of the nation's imports remained uncovered by an agreement.

Economists expect the Federal Reserve will keep its benchmark interest rate in the 4.25%-4.50% range after the end of a two-day policy meeting on Wednesday, resisting pressure from Trump to lower borrowing costs. The Fed cut rates three times in 2024, with the last move coming in December.

"Now that delinquencies are starting to rise for upper-income consumers, we expect consumer spending to moderate further in the coming quarters," said Jeffrey Roach, chief economist at LPL Financial. "The Fed will likely be in a good place to cut rates by their September meeting."